SBP likely to keep rate at 11% amid inflation risks

• Analysts expect no rate cut in the upcoming SBP policy meeting.
• Rising food prices are keeping the central bank cautious about interest rate decisions.
• IMF urges SBP to keep monetary policy tight and data-driven.
  

The State Bank of Pakistan (SBP) is expected to keep its key interest rate at 11% for a fifth straight session on Monday, with analysts citing inflationary risks from food prices and external pressures.

The majority of analysts and research from brokerage firms do not expect a rate cut at next week’s meeting. Core inflation is picking up gradually, rising from 4.1% in July to 6.1% in November, largely due to food supply disruptions caused by floods, The News reported on Sunday.

After cutting interest rates by 1,100 basis points (bps) from June 2024, the SBP has kept them steady at 11% in its last four meetings, with the most recent cut in May.

An analyst at Arif Habib Limited (AHL) said in a recent note that the central bank is likely to keep interest rates steady at the December meeting. This decision would aim to maintain stability while adopting a cautious stance as the base effect that had kept metric inflation low is now fading.

“The slight widening of the current account deficit and the early stage of the domestic economic recovery further support a prudent approach by the central bank,” he added.

According to the AHL report, inflationary pressures may increase in the near term. Seasonal factors such as Ramazan and Eid falling in the second half of FY2026 could drive monthly inflation rates higher. “There remains the possibility that inflation may temporarily test double-digit levels if monthly momentum accelerates; however, the full-year 26-year average is likely to remain within SBP’s medium-term target of 5-7%,” it said.

On the external front, conditions are generally stable but require careful monitoring. Rising import demand and changing trade dynamics could create additional pressure going forward, the report noted.

Some analysts now believe that the SBP will not begin easing monetary policy until the next fiscal year, starting in July 2026.

“Our base case assumes a 100 bps cut [basis points] in interest rates during FY27, while remaining flat for the remainder of FY26,” said Mustafa Mustansir, head of research at Taurus Securities Limited.

Analysts said the SBP’s tendency to keep real interest rates positive would make policymakers cautious.

“An unchanged rate also helps maintain positive real interest rates and is in line with the policy of discipline supported by the IMF, especially amid fragile external buffers,” said Saad Hanif, head of research at Ismail Iqbal Securities.

“With most of the slack already delivered earlier, the MPC [Monetary Policy Committee] is likely to wait for clearer, sustained deflation before considering further cuts,” Hanif added.

The International Monetary Fund, in a staff report released on Thursday, said monetary policy should remain sufficiently tight and data-driven to keep inflation within the SBP’s target range. The report notes that the central bank’s cautious approach has helped manage inflation risks despite volatile conditions and temporary declines in headline inflation. The IMF said the SBP has kept the policy stance positive in real terms on a forward-looking basis.

“Going forward, the SBP should continue to closely monitor the impact of the recent floods on inflation and the external position and be ready to act decisively to maintain well-established expectations,” it said.